Academic journal article The Cato Journal

Public Sector Unions and the Rising Costs of Employee Compensation

Academic journal article The Cato Journal

Public Sector Unions and the Rising Costs of Employee Compensation

Article excerpt

Public sector compensation is becoming a high-profile policy issue. While private sector wages and benefits have stagnated during the recession, many governments continue to increase compensation for public sector workers. At the same time, there are growing concerns about huge underfunding in public sector retirement plans across the nation.

This article examines the compensation of state and local workers, who account for 20 million of the 23 million civilian government workers in the United States. (1) State and local workers include teachers, college instructors, police officers, health care administrators, and many other occupational groups.

Examining state and local compensation is important because it represents a major portion of the overall U.S. economy. In 2008, the total cost of wages and benefits for state and local workers was $1.1 trillion, which was half of the $2.2 trillion in total spending by state and local governments. (2) Compensation costs are expected to rise rapidly in coming years due to growing pension and health care costs.

This study begins with a look at trends in state and local government compensation since 1950. Then it compares compensation levels in the public and private sectors using data for 2008, Note that I will use the phrase "public sector" to refer to state and local governments and not the federal government, which is not examined here.

Next, the growth of labor unions in the public sector workforce is discussed. In 2008, 39 percent of state and local workers were members of unions, but that percentage varies widely by state as a result of differences in state legislation on collective bargaining and other aspects of union organization.

Does the presence of labor unions in the public sector increase the costs of public sector compensation? I use state-level data on public sector compensation and union shares in an OLS regression to explore this question. I find that public sector unions push up the costs of the public sector workforce in the United States by about 8 percent, on average, but the increase would be more in states with highly unionized public sectors such as California.

The final section discusses the coming fiscal crisis in state and local budgets. Many state and local governments have huge unfunded obligations in worker retirement plans, and they will need to make major reforms to their budgets in the years ahead. However, enacting reforms will be a significant challenge given the resistance to change in the politically active and unionized workforces of state and local governments.

Growth in Public Sector Compensation

The U.S. Bureau of Economic Analysis publishes time series data on employment and compensation by industry. (3) Based on these data, Figure 1 shows average compensation levels in the public and private sectors since 1950. Compensation includes wages and benefits, such as the costs of health care and pensions. The data are in constant 2008 dollars, deflated by the consumer price index.

Between 1950 and about 1980, average compensation in the public and private sectors moved in lockstep. But 'after 1980, public sector compensation growth began to outpace private sector compensation growth, and by the mid-1990s public sector workers had a substantial pay advantage. In the boom years of the late-1990s, private sector workers closed the gap a bit, but public sector pay moved ahead again in the 2000s.


The public sector pay advantage is most pronounced in benefits. Bureau of Economic Analysis data show that average compensation in the private sector was $59,909 in 2008, including $50,028 in wages and $9,881 in benefits. Average compensation in the public sector was $67,812, including $52,051 in wages and $15,761 in benefits.

The BEA data break down the public sector workforce into three groups: education, public enterprises (such as government liquor stores), and all other government functions. …

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